PEOPLEParaguay's population is distributed unevenly throughout the country. The vast majority of the people live in the eastern region, most within 160 kilometers (100 mi.) of Asuncion, the capital and largest city. The Chaco, which accounts for about 60% of the territory, is home to less than 2% of the population. Ethnically, culturally, and socially, Paraguay has one of the most homogeneous populations in South America. About 95% of the people are of mixed Spanish and Guarani Indian descent. Little trace is left of the original Guarani culture except the language, which is understood by 90% of the population. About 75% of all Paraguayans speak Spanish. Guarani and Spanish are official languages. Germans, Japanese, Koreans, ethnic Chinese, Arabs, Brazilians, and Argentines are among those who have settled in Paraguay.

HISTORYPre-Columbian civilization in the fertile, wooded region that is now Paraguay consisted of numerous seminomadic, Guarani-speaking tribes, who were recognized for their fierce warrior traditions. They practiced a mythical polytheistic religion, which later blended with Christianity. Spanish explorer Juan de Salazar founded Asuncion on the Feast Day of the Assumption, August 15, 1537. The city eventually became the center of a Spanish colonial province. Paraguay declared its independence by overthrowing the local Spanish authorities in May 1811.

The country's formative years saw three strong leaders who established the tradition of personal rule that lasted until 1989: Jose Gaspar Rodriguez de Francia, Carlos Antonio Lopez, and his son, Francisco Solano Lopez. The younger Lopez waged a war against Argentina, Uruguay, and Brazil (War of the Triple Alliance, 1864-70) in which Paraguay lost half its population; afterwards, Brazilian troops occupied the country until 1874. A succession of presidents governed Paraguay under the banner of the Colorado Party from 1880 until 1904, when the Liberal party seized control, ruling with only a brief interruption until 1940.

In the 1930s and 1940s, Paraguayan politics were defined by the Chaco war against Bolivia, a civil war, dictatorships, and periods of extreme political instability. Gen. Alfredo Stroessner took power in May 1954. Elected to complete the unexpired term of his predecessor, he was re-elected president seven times, ruling almost continuously under the state-of-siege provision of the constitution with support from the military and the Colorado Party. During Stroessner's 34-year reign, political freedoms were severely limited, and opponents of the regime were systematically harassed and persecuted in the name of national security and anticommunism. Though a 1967 constitution gave dubious legitimacy to Stroessner's control, Paraguay became progressively isolated from the world community.

On February 3, 1989, Stroessner was overthrown in a military coup headed by Gen. Andres Rodriguez. Rodriguez, as the Colorado Party candidate, easily won the presidency in elections held that May and the Colorado Party dominated the Congress. In 1991 municipal elections, however, opposition candidates won several major urban centers, including Asuncion. As president, Rodriguez instituted political, legal, and economic reforms and initiated a rapprochement with the international community.

The June 1992 constitution established a democratic system of government and dramatically improved protection of fundamental rights. In May 1993, Colorado Party candidate Juan Carlos Wasmosy was elected as Paraguay's first civilian president in almost 40 years in what international observers deemed fair and free elections. The newly elected majority-opposition Congress quickly demonstrated its independence from the executive by rescinding legislation passed by the previous Colorado-dominated Congress. With support from the United States, the Organization of American States, and other countries in the region, the Paraguayan people rejected an April 1996 attempt by then-Army Chief Gen. Lino Oviedo to oust President Wasmosy, taking an important step to strengthen democracy.

Oviedo became the Colorado candidate for president in the 1998 election, but when the Supreme Court upheld in April his conviction on charges related to the 1996 coup attempt, he was not allowed to run and remained in confinement. His former running mate, Raul Cubas Grau, became the Colorado Party's candidate and was elected in May in elections deemed by international observers to be free and fair. However, his brief presidency was dominated by conflict over the status of Oviedo, who had significant influence over the Cubas government. One of Cubas' first acts after taking office in August was to commute Oviedo's sentence and release him from confinement. In December 1998, Paraguay's Supreme Court declared these actions unconstitutional. After delaying for 2 months, Cubas openly defied the Supreme Court in February 1999, refusing to return Oviedo to jail. In this tense atmosphere, the murder of Vice President and long-time Oviedo rival Luis Maria Argana on March 23, 1999, led the Chamber of Deputies to impeach Cubas the next day.

The March 26 murder of eight student antigovernment demonstrators, widely believed to have been carried out by Oviedo supporters, made it clear that the Senate would vote to remove Cubas on March 29, and Cubas resigned on March 28. Despite fears that the military would not allow the change of government, Senate President Luis Gonzalez Macchi, a Cubas opponent, was peacefully sworn in as president the same day. Cubas left for Brazil the next day and received asylum. Oviedo fled the same day, first to Argentina, then to Brazil. In December 2001, Brazil rejected Paraguay's petition to extradite Oviedo to stand trial for the March 1999 assassination and "marzo paraguayo" incident.

Gonzalez Macchi offered cabinet positions in his government to senior representatives of all three political parties in an attempt to create a coalition government. The Liberal Party, however, pulled out of the consensus government in February 2000 and stands in opposition to the Gonzalez Macchi administration. Liberal Julio Cesar Franco won the August 2000 election to fill the vacant vice presidential position, but resigned to pursue the presidency in October 2002. Gonzalez Macchi was found not guilty in a Senate impeachment trial involving corruption and mismanagement charges in February 2003.

GOVERNMENT AND POLITICAL CONDITIONSParaguay's highly centralized government was fundamentally changed by the 1992 constitution, which provides for a division of powers. The president, popularly elected for a 5-year term, appoints a cabinet. The next presidential elections are scheduled for April 2003. The bicameral Congress consists of an 80-member Chamber of Deputies and a 45-member Senate, elected concurrently with the president through a proportional representation system. Deputies are elected by department and senators nationwide. Paraguay's highest judicial body is the Supreme Court. Each of Paraguay's 17 departments is headed by a popularly elected governor.

Principal Government OfficialsPresident--Luis Angel GONZALEZ MACCHI Minister of Foreign Affairs--Jose Antonio MORENO RUFFINELLIAmbassador to the U.S.--Leila RACHID Lichi de CowlesAmbassador to the OAS--Enrique CHASE Plate Ambassador to the UN--Eladio LOIZAGA

Paraguay maintains an embassy in the United States at 2400 Massachusetts Avenue, NW, Washington, DC 20008 (tel. 202-483-6960). Consulates are in Miami, New York, and Los Angeles.

ECONOMYParaguay has a predominantly agricultural economy, with a struggling commercial sector. There is a large subsistence sector, including sizable urban unemployment and underemployment, and a large underground re-export sector. The country has vast hydroelectric resources, including the world's largest hydroelectric generation facility built and operated jointly with Brazil (Itaip� Dam), but it lacks significant mineral or petroleum resources. The government welcomes foreign investment in principle and provides national treatment to foreign investors, but widespread corruption is a deterrent. The economy is dependent on exports of soybeans, cotton, grains, cattle, timber, and sugar; electricity generation, and to a decreasing degree on re-exporting to Brazil and Argentina products made elsewhere. It is, therefore, vulnerable to the vagaries of weather and to the fortunes of the Argentine and Brazilian economies.

According to Paraguayan Central Bank (BCP), Paraguay's GDP in 2002 of $5.60 billion in current dollars represented a decrease of 2.2% from 2001. The GDP per capita fell to $940, its lowest level in 17 years. Given the importance of the informal sector, accurate economic measures are difficult to obtain. Paraguay generally maintains a small balance-of-payments surplus. In early 2003, official foreign exchange reserves fell to below $641 million, and foreign official debt rose slightly to $2.28 billion. The local currency lost over 50% of its value against the dollar in 2002. Inflation rose to 14.6%.

Agriculture and CommerceAgricultural activities, most of which are for export, represent about 24% of GDP. More than 200,000 families depend on subsistence farming activities and maintain marginal ties to the larger productive sector of the economy. The commercial sector is primarily engaged in the import of goods from Asia and the United States for re-export to neighboring countries. The recorded activities of this sector have declined significantly in recent years, placing a strain on government finances, which depend heavily on taxes on this trade. In general, Paraguayans prefer imported goods, and local industry relies on imported capital goods. The underground economy, which is not included in the national accounts, may equal the formal economy in size. The bulk of underground activity centers on the unregistered sale of imported goods--including computers, sound equipment, cameras, liquor, and cigarettes--to Argentina and Brazil.

Post-Stroessner ReformsSince 1989, the government has deregulated the economy, which had been tightly controlled by President Stroessner's authoritarian regime. The Rodriguez and Wasmosy administrations eliminated foreign exchange controls and implemented a dirty floating exchange rate system, reformed the tax structure and established tax incentives to attract investment, reduced tariff levels, launched a stock market, and began a process of financial reform. Though the short-lived Cubas administration was hampered by political conflicts, it attempted to reduce the rising government deficit by cutting spending, to fight intellectual property piracy in order to attract foreign investment, and to address a financial sector crisis that had simmered since 1995. Under political pressure, the Gonzalez Macchi government has had to suspend a process of privatization and economic reforms. Movement on these issues may have to await the new government takes office in August 2003 (national elections take place on April 27, 2003). In the meanwhile, the fiscal deficit has grown, and Paraguay's external debt now reaches 40% of current GDP.

The central government budget, excluding decentralized agencies and state-owned enterprises, represents more than 20% of GDP.

DEFENSEThe constitution designates the president as commander in chief of the armed forces. Military service is compulsory, and all 18-year-old males--and 17 year olds in the year of their 18th birthday--are liable for one year of active duty. The 1992 constitution allows for conscientious objection. Of the three services, the army has the majority of personnel, resources, and influence. With about 7,000 personnel, it is organized into three corps, with six infantry divisions and three cavalry divisions. The military has two primary functions: national defense, including internal order, and engaging in civic action programs as directed by the president. The navy consists of about 2,000 personnel divided into three service branches. The air force, the newest and smallest of the services, has about 1,500 personnel.

FOREIGN RELATIONSParaguay is a member of the United Nations and several of its specialized agencies. It also belongs to the Organization of American States, the Latin American Integration Association (ALADI), the Rio Group, INTELSAT, INTERPOL, and MERCOSUR (the Southern Cone Common Market). Its foreign policy has followed closely the Rio Group's lead on many issues of wideranging political importance. Paraguay is closely aligned with its MERCOSUR partners on many political, economic and social issues.

U.S. Interests in ParaguayThe United States and Paraguay have an extensive relationship at the government, business, and personal level. Paraguay is a partner in hemispheric initiatives to improve counternarcotics cooperation, combat money laundering and other illicit cross-border activities, and adequately protect intellectual property rights. The United States looks to Paraguay, which has substantial rainforest and riverine resources, to engage in hemispheric efforts to ensure sustainable development. As a member of MERCOSUR, Paraguay supports the move toward a Free Trade Area of the Americas. The United States and Paraguay also cooperate in a variety of international organizations.

Paraguay has taken significant steps to combat terrorism-financing activity in the tri-border area it shares with Argentina and Brazil. It participates in antiterrorism programs and fora with its neighbors and the United States.

The United States strongly supports consolidation of Paraguay's democracy and continued economic reform, the cornerstones of cooperation among countries in the hemisphere. The United States has played important roles in defending Paraguay's democratic institutions, in helping resolve the April 1996 crisis, and in ensuring that the March 1999 change of government took place without further bloodshed.

Bilateral trade with the United States has steadily declined over the years, as the Paraguayan economy remained mired in a long-term recession. Although U.S. imports from Paraguay are only about $32 million per year, U.S. exports to Paraguay approached $396 million in 2001, according to U.S. Customs data. (Not all U.S. exports are reflected in Paraguayan government data.) More than a dozen U.S. multinational firms have subsidiaries in Paraguay. These include firms in the computer, agroindustrial, telecom, and banking and other service industries. Some 75 U.S. businesses have agents or representatives in Paraguay, and more than 3,000 U.S. citizens reside there. In November 1998, U.S. and Paraguayan officials signed a memorandum of understanding on steps to improve protection of intellectual property rights in Paraguay, and in 2001 Paraguay improved enforcement efforts against contraband and piracy activities.

U.S. Assistance The U.S. Government has assisted Paraguayan development since 1942. The U.S. Agency for International Development (USAID) currently supports a variety of programs to strengthen Paraguay's democratic institutions in the areas of civil society, local government and decentralization, and national reform of the state. Other important areas of intervention are the environment and public health. Current plans call for the development of new activities supporting economic growth. The total amount of the program is $11 million in fiscal year 2002.

The U.S. Department of State and the Drug Enforcement Administration provide technical assistance, equipment, and training to strengthen counternarcotics enforcement and to assist in the development and implementation of money laundering legislation. The U.S. Department of Defense provides technical assistance and training to help modernize, professionalize, and democratize the military. The Peace Corps has about 180 volunteers working throughout Paraguay on projects ranging from agriculture and natural resources to education, rural health, and urban youth development. The Office of Public Diplomacy also is active in Paraguay, providing information on the United States to the press and public, as well as helping to arrange educational and citizen exchanges to promote democracy.

The U.S. Embassy in Paraguay is located at 1776 Avenida Mariscal Lopez, Asuncion (tel. (595) (21) 213-715, fax (595) (21) 213-728). The embassy's home page address on the World Wide Web is: http://paraguay.usembassy.gov/

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